Rather than tax harmonisation, the case for budgetary federalism

, by Guillaume Bullier, Translated by Lorène Weber

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Rather than tax harmonisation, the case for budgetary federalism
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The term “harmonisation” has been heard a lot lately, upon debates around European politics. Some consider it as a sine qua non condition to lead common policies, while others regard it as one purpose of European integration. Why such an obsession? Is harmonisation truly compatible with democratic values and subsidiarity?

Harmonisation: an unfair constraint

The idea of tax harmonisation implies to constrain the member states in the elaboration of their tax policy. It is about setting rules concerning the taxes to raise and their rates, in order to supply the national budgets. From a strictly logical viewpoint, this idea is already absurd: if it is about leading similar policies across Europe, the interest to lead them at the national level is then put into question.

Tax harmonisation means that the states would lose control over their income and would lose their democratic liberty to raise the taxes they want. At the same time, it would not enable the European Union to benefit from a budget allowing it to lead the policies wished by its citizens. As such, this constraint is pointless.

The supposed interest of tax harmonisation, which is sometimes wished within some high-tax member states, is to fight tax competition. This harmonisation actually aims at protecting the economic interests of these countries to the detriment of the development of other countries and their citizens. As it is driven by national interests, the idea of tax harmonisation thus answers to a nationalist logic.

Harmonisation thus represents a useless and immoral constraint over the states, without bringing resources to the European Union. It does not only go against common sense, but also goes against federalist principles.

Budgetary federalism: a fair share of competences

The EU, rather than controlling tax levies that do not belong to it, needs the democratic liberty to raise its own taxes to supply its own budget, without interfering in the management of the member states’ tax revenues. Today, 70% of the EU budget (which represents 1% of the member states’ GDP) is funded through the member states’ contributions. The EU’s tax resources (VAT, import levies…) are weak and depend upon the states’ agreement. Giving the EU the tax competences it needs must goes with the evident democratic control by the EU institutions. This would allow the European citizens to decide together upon the policies they wish to see applied, with no possible blockage from the national governments.

Budgetary federalism aims at granting each level of decision with the freedom to democratically decide upon its tax resources. Each and every level (local, regional, national and European) should thus have all leeway to raise or not the taxes it wants (and to decide upon the modalities) in order to build its budget, and to report on its citizens.

To answer the European Union’s social and democratic challenges, rather than asking for tax harmonisation, we should better act for granting tax competences to the European Union, and for respecting the principle of subsidiarity. If we collectively consider that a fuel tax is relevant and should be the same across the EU, then we should allow it for supplying our common budget. And if a state wants to fund its national budget through taxing the labour income of its inhabitants, it is free to do so.

The diversity of the models is to the citizens’ advantage

When the states or the local authorities are free to define their tax policy, the door is open for political innovation. Moreover, competition between local authorities allows to strengthen the citizens’ influence upon the actions of their elected representatives, aside from electoral periods. Indeed, the citizens’ possibility to move from one place to another urges the elected representatives to make sure of their territory’s attractivity and their policies’ quality. All this has a catalytic effect to find fairer tax models, able to build a consensus. What better way to reinforce the consent to taxation?

Therefore, those who are convinced that European integration must allow to strengthen the citizens’ power, should fight against the will to define tax rules behind closed doors. They should call for granting both the EU and the local authorities with tax autonomy, and to ensure the democratic nature of the decision-making processes.

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